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The right of rescission is a consumer protection provided by the federal Truth in Lending Act, also known as Regulation Z. It gives individuals the option to cancel certain residential loans within three business days of receiving and the paperwork. If you’re wondering how to get out of a mortgage, the three-day right of rescission could help you in some circumstances.
How the Right of Rescission Works
To rescind something means to take it back or cancel it. Rescission is an act of rescinding. You can rescind an invitation to your birthday party. And you can undo a lot of regrettable financial decisions pretty easily: just return those $300 headphones to the store. Other times, we’re stuck with choices we wish we hadn’t made: You can’t get back the $100 you spent on fancy sushi just because you’re still hungry.
When it comes to certain mortgages, you do have a small window to change your mind and cancel—or rescind—the transaction. Let’s get one thing out of the way, though: You can’t change your mind and easily get out of the house you just purchased. To undo that decision, you’ll have to sell your home, and it will cost you.
But if your stomach is churning over a refinance, home equity loan, home equity line of credit (HELOC) or reverse mortgage, you might be in luck.
Why You Might Want to Rescind a Mortgage Contract
The right of rescission acts as a buyer’s remorse escape hatch to get you out of the deal if you’re having second thoughts about the mortgage agreement you’ve just entered.
- Maybe you’re second guessing whether you really want to cash out your home equity, whether you can afford the new monthly payment or whether you’re happy with the interest rate.
- Maybe interest rates suddenly dropped and you don’t want to be stuck paying the rate you just signed a contract for.
- Maybe you lost your job and you know your new loan payment will be a burden.
The best part? It doesn’t matter what the reason is, and you don’t have to give the lender any explanation.
Types of Loans for Which the Right of Rescission Applies
The right of rescission does not apply to all types of home loans. Here’s when it does and does not apply.
In short, the right of rescission generally applies under these four conditions:
- It’s a personal mortgage
- It’s secured by your primary residence
- It’s not being issued by your current lender
- It’s not being used to buy your home
Exception 1: If you’re doing a cash-out refinance with your existing lender, the right of rescission does apply to the amounts you’re borrowing that exceed what you currently owe.
Exception 2: The right of rescission does apply to a bridge loan that you’re using to buy your next home.
When the Rescission Period Begins and Ends
Here’s an example of how the rescission period works:
- On Friday, you sign the promissory note for your mortgage. You also receive your closing disclosure and two physical copies (or one electronic copy) of the notice of your right to rescind. The lender has complied with its obligations, which means the rescission clock can start.
- Saturday is day one.
- Sunday does not count toward your three days because it is not a business day.
- Monday is day two.
- Tuesday is day three.
- At midnight—one minute after 11:59 pm on Tuesday—your rescission period expires, and you no longer have the right to cancel your mortgage.
Even if you’re happy with your transaction and want to complete it, the right of rescission means that it will take more than three business days for your loan to fund after you sign your refinance or reverse mortgage contract. The lender needs to make sure you will go through with the transaction before giving you money.
The Three-year Loophole
The lender must give you a written notice stating the annual percentage rate (APR), finance charge, amount financed, total of payments and payment schedule to protect its rights and make sure you are properly informed about the terms of your loan. This information is usually provided on your closing disclosure.
If your lender does not provide you with your closing disclosure and two physical copies (or one electronic copy) of the notice of your right to rescind, or if your closing disclosure is inaccurate in certain ways—for example, if it understates the interest rate Your lender is going to charge you—your right of rescission changes. Instead of three days, the timeline stretches out to as long as three years.
The idea behind all these disclosure requirements, notices and cancellation timelines is to make sure borrowers understand the agreements they are entering and lenders don’t take advantage of borrowers who are generally less well-versed in mortgages than lenders are.
Waiving Your Right of Rescission
You can waive or modify your right of rescission in writing if you are experiencing a personal financial emergency. You must specify what the emergency is in your written request.
Yourer doesn’t have to approve your request. In fact, they might be reluctant to let you waive or shorten the rescission period because they don’t want a regulator or lawyer to later question their compliance with the Truth in Lending Act.
How to Exercise the Three-day Right of Rescission
You must exercise your right of rescission in writing. Make sure to deliver it to your lender or get it postmarked and mailed before the three-day window closes.
Keep a copy for your records and get written confirmation that you exercised your right before your time was up, in case your lender tries not to honor your request. The place where you should send or deliver your notice should be provided on the notice of your right to rescind.